Sunday, September 20, 2015

China’s Real GDP Growth Rate

It’s late July and I’m writing up an article from late April. In the past 3 months, not only are we continuing to worry about how China’s economy is doing, but now their stock market has crashed too: it’s off by 1/3 since mid-June. For perspective, that’s roughly as much as the NYSE lost in 1929.

I am not a huge fan of the stock market as an indicator of macroeconomic performance. And that’s in the U.S. where investors have thick markets to choose from. In China, investors are limited in their choices, and are allowed to buy stock on margin: this is a recipe for a stock market to get unhinged from the underlying economy.

But, back to China’s growth rate, and the article I found interesting.

“Growth Likely Overstated,” said a Citibank report, concluding that actual quarterly growth could be below 6% year to year, depending on the factors weighed. Other research firms put their numbers far lower, with Capital Economics pegging the quarter at 4.9%, the Conference Board’s China Center at 4% and Lombard Street Research at 3.8%.

That’s quite the range of numbers. And that low end of 3.8%. That’s the range a developed economy can hit fairly regularly (although we’ve had trouble with that for 8 years now). But for a developing country like China, that rate is terribly low. As in, never-going-to-develop low.

Here’s the kicker:

… The figures are suspiciously smooth, with none of the sharp gyrations seen in the U.S. or other economies. The methodology often appears inconsistent or contradictory. Also, no one knows how China accounts for inflation when tabulating its gross domestic product.

Note that last sentence, and think about how we work through GDP in class. We start out by counting up nominal GDP. But there’s no way to count up real GDP. Instead, we estimate inflation, remove it from nominal GDP, and what we’re left with is real GDP.

If analysts are saying “no one knows how China accounts for inflation”, what they really mean is no one thinks their growth rates are credible or accurate.

Off the record, the leaders in China seem aware of this problem:

… Roundabout backing of Premier [Li], who in 2007 as Communist Party chief of northeastern Liaoning province criticized China’s GDP numbers as “man-made and therefore unreliable,” according to a memo by the U.S. ambassador at the time, later released by WikiLeaks.

I guess WikiLeaks was good for something.

Read the whole thing, entitled “China’s True Growth Is a Mystery; Economists Weigh the Clues” in the April 26 issue of The Wall Street Journal.